Monday Morning Cup of Coffee is a quick look at the news coming across the HousingWire weekend desk, with more coverage to come on bigger issues.
The price of oil is declining, leading to lower interest rates and a flatter yield curve, notes Bank of America/Merrill Lynch structured finance strategist Chris Flanagan, in a note to clients. Convexity cost in the agency MBS market has increased, particularly after President Obama's surprise announcement that the Federal Housing Administration would lower the mortgage insurance premium for both purchase and refinancing mortgages. (Convexity is a measure predicting the relationship between bond yield and the impact of interest rates changes.)
“Credit spread volatility in the corporate bond market is spilling over to securitized products, even though lower oil prices and interest rates are improving the fundamental backdrop for consumer ABS and residential MBS in particular,” Flanagan writes.
“Comparison of oil's price decline in the past six months with that of ABX in late 2007 provides some interesting food for thought. We are reminded of the negative feedback loop on ABX prices where systemic margin calls drove prices sharply and quickly lower (although not as quickly as oil!)," he added. "That seems relevant to the oil story and is consistent with our commodity strategists' view that oil could move down to $40/bbl in a 'disorderly' way."
“Conversely, the fundamental implications of ABX's price decline, which reflected a drop in the price of households' primary asset, housing, are likely the direct opposite of oil's price decline, which reduces a consumption cost for households. ABX's price decline reflected a fundamental negative while oil's price decline is a fundamental positive,” Flanagan says.
Flangan says that after some big market moves to start 2015, we should see some near-term stabilization on rates, digesting the gains, and opportunity for credit spreads to begin to narrow.
“But to state things very simply, we think the main story for securitized products remains the price of oil. If oil continues to move lower, perhaps in a more disorderly fashion, we think treasury yields are likely to continue to move lower and the yield curve is likely to flatten further,” he says. “This scenario likely would be a near-term negative for spread products.”
Meanwhile, analysts at Barclays are looking at what the cards hold for Ocwen Financial (OCN) in particular going forward, and residential credit in general.
“Non-agencies started 2015 on a stable note, with prices of cash and GSE credit bonds little changed. We think the circumstances may be right for Ocwen to start exercising cleanup calls on its deals more aggressively,” say Jasraj Vaidya and Harkaran Talwar at Barclays. “Meanwhile, the FHA announced a surprise 50bp reduction in MIP, which should be positive for housing and non-agencies in the long run. Trustees accepted Citigroup's settlement for the vast majority of deals and Corelogic November home prices showed a continuing stabilization trend.”
While, the analysts note, Ocwen continues to face pressures on the mortgage servicing front, financing the exercise of these calls should be somewhat easier since the most callable pools have very high current loan concentrations.
“Although Ocwen already had some cash on its balance sheet, liquidity requirements (especially given pending settlements) may have prevented it from using that cash to call non-agency deals. However, following the settlement with NY, Ocwen announced in a conference call that it plans to sell its agency servicing portfolio,” they say. “While the MSRs secure certain financing vehicles/instruments for Ocwen, such sales could be a possible source of cash that may be used to exercise cleanup calls. As a result, if Ocwen can successfully sell for agency MSR pools then we would expect the likelihood of non-agency calls to rise.”
For a less-than-positive take on the much-lauded cut of 50 basis points from FHA premiums that Obama announced last week, John Berlau at the American Enterprise Institute, a pro-free market think tank that leans right, writes that what is needed to give housing a boost is Dodd-Frank reform:
The QM provisions are now so costly and complex that community banks and credit unions — as far away as one could get from the causes of financial crises — have sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representatives responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s (D-Nev.) desk.
Yet Thursday, in a much-hyped speech on housing in Phoenix, President Obama chose not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.
Meanwhile, mortgages — even heavily subsidized ones — still will churn slowly until provisions of Dodd-Frank are repealed or at lease scaled back. Leaders of community banks and credit unions have testified that QM prevents mortgages even to borrowers with stellar credit because of its many mandates that have nothing to do with credit quality.
For the full opinion piece, click here.
And for another contrarian view of the wisdom of cutting FHA premiums by one of HousingWire’s humble scribes, click here.
No banks were closed the week ending Jan. 9, according to the FDIC.